A pair of mortgage trade groups agree that loan originator (LO) compensation regulations should be changed, though they have diverging stances on how to achieve beneficial reform.
The LO comp rule, a component of the Dodd-Frank Act implemented in 2013 by the Consumer Financial Protection Bureau, runs 541 pages and is quite complex. In a nutshell, it restricts how loan originators can be compensated, generally limiting it to a fixed percentage of the loan amount.
The rule also banned what’s known as “yield spread premiums,” which is when a mortgage broker earns a commission from a lender for steering a borrower toward a higher interest rate loan in exchange for lower upfront costs.
The Community Home Lenders of America (CHLA), a nonprofit association representing small and midsized independent mortgage banks, recently published a white paper arguing that the LO comp rule went too far when it also restricted compensation for in-house loan originators at mortgage banks.
CHLA noted that the inflexibility of the current law means that loan originators cannot cut their fees to compete with last-minute loan offers from competing third-party lenders. Thus, consumers are sometimes faced with the difficult choice of taking the lower offer or paying more to continue working with the loan originator they’ve established a relationship with.
The white paper also observed that many mortgage bankers have stopped using state housing finance agency (HFA) programs that offer lower downpayment options for borrowers from underserved communities, as LO comp restrictions have made these products unprofitable.
CHLA argues that the LO comp rule should be confined to compensation practices between unrelated companies, such as when a mortgage broker acts as an intermediary between the borrower and lender.
“LO comp restrictions on compensation to a lender’s [in-house loan originators] harms consumers, is based on a flawed theory, ignores increased price shopping, sets a harmful precedent and creates an unlevel playing field,” the white paper concludes.
NAMB affirms support for yield spread premium concept
In a position statement provided to Scotsman Guide, the National Association of Mortgage Brokers (NAMB) agrees that current LO comp rules hurt consumer choice, that HFA loans are disproportionately affected, and that originators should be able to lower their compensation to match a competitive loan offer.
But NAMB also supports the concept of the yield spread premium (YSP), sometimes referred to more broadly as lender-paid compensation.
“Properly structured YSP (lender-paid compensation) allows borrowers to finance their closing costs into the interest rate, reducing the barrier to homeownership,” the position statement maintains. “It also supports mortgage brokers who serve first-time buyers, veterans and credit-challenged borrowers — often without charging direct fees.”
Valerie Saunders, NAMB’s chief executive strategist, said in an interview that she disagrees with how the CHLA white paper positioned yield spread premiums.
“They’re categorizing it as a practice where banks or other aggregators offer higher fees as incentives for mortgage brokers to secure loans with a higher mortgage rate,” Saunders said. “And I think that is a complete miscategorization of what YSP or lender-paid comp is.”
Saunders elaborated, “The mortgage broker as a business is the most transparent channel that exists, because we are the only channel where the consumer knows exactly how much money we’re going to make on a loan.” She added that yield spread premiums allow borrowers to assume a slightly higher interest rate in exchange for upfront credits that can be applied toward closing costs, “so it helps them not have to bring as much money to the table.”
NAMB’s position statement concludes that the association supports “responsible, transparent use of lender-paid compensation as a vital tool for providing flexible, borrower-friendly financing options,” adding that “we believe that LO comp regulations should distinguish between anti-consumer abuses of the past and legitimate, pro-consumer business practices that promote access and affordability.”
